Q3 2016 Earnings October 26, 2016 - Garmin International ...

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Q3 2016 Earnings October 26, 2016 - Garmin International ...
Q3 2016 Earnings
October 26, 2016
Q3 2016 Earnings October 26, 2016 - Garmin International ...
Safe Harbor Statement
 These materials include projections and other forward-looking statements. These
 statements are based on the current expectations of Garmin Ltd. and are naturally
 subject to uncertainty and changes in circumstances. Forward-looking statements
 include, without limitation, statements containing words such as "proposed" and
 “intends” or “intended” and "expects" or "expected." Any statements regarding
 Garmin’s revenue, GAAP and pro forma estimated earnings and EPS, and tax rate
 for fiscal 2016, Garmin’s expected segment revenue growth rates, margins,
 currency movements, expenses, pricing, new products to be introduced in 2016
 and Garmin’s plans and objectives are forward-looking statements. By their
 nature, forward-looking statements involve risk and uncertainty because they
 relate to events and depend on circumstances that will occur in the future. There
 are a number of factors that could cause actual results and developments to differ
 materially from those expressed or implied by such forward-looking statements.
 Other unknown or unpredictable factors could cause actual results to differ
 materially from those in the forward-looking statements. These factors include
 those discussed or identified in the filing by Garmin Ltd. with the U.S. Securities
 and Exchange Commission in its Annual Report on Form 10-K. Garmin Ltd. does
 not undertake any obligation to update publicly or revise forward-looking
 statements, whether as a result of new information, future events or otherwise,
 except to the extent legally required.

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Q3 2016 Earnings October 26, 2016 - Garmin International ...
Business Update

       Cliff Pemble
     President and CEO

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Q3 2016 Earnings October 26, 2016 - Garmin International ...
3rd Quarter Financial Review
Solid third quarter revenue, four of five segments attained
     double digit sales and operating income growth

•       Consolidated revenue of $722 million, up 6%

•       Fitness, outdoor, marine and aviation segments combined grew 24%
        and contributed 70% of total revenue

•       Expanded gross margin and operating margin to 56.2% and 22.1%,
        respectively

•       Operating income growth of 27%

•       GAAP EPS of $0.66 and pro forma EPS of $0.75

•       Launched new product categories with the vívofit jr. and fēnix Chronos
    3
Q3 2016 Earnings October 26, 2016 - Garmin International ...
Fitness
3rd Quarter Business Review
• Revenue growth of 32% driven by strong
  demand for wearables
• Gross and operating margin of 55% and
  24%, respectively
• Operating income growth of 68%

Market/Product Update
• Introduced and shipped our newest fitness wearables;
  Forerunner 35 and vívofit jr.
• Partnered with Cerner to incorporate health and wellness
  data into their wellness and population health solutions

  4
Q3 2016 Earnings October 26, 2016 - Garmin International ...
Outdoor
3rd Quarter Business Review
• Revenue growth of 28% driven by strong
  demand for outdoor wearables
• Gross margin and operating margin
  expanded to 63% and 35%, respectively
• Operating income growth of 32%

Market/Product Update
• Launched the fēnix Chronos, adding luxury
  and more style to our popular multisport line
  of fēnix watches
• Launched updated Rino 700 series, a
  rugged two-way radio

  5
Q3 2016 Earnings October 26, 2016 - Garmin International ...
Marine
3rd Quarter Business Review
•       Revenue growth of 12% with growth in
        multiple product lines
•       Gross margin and operating margin of
        57% and 15%, respectively
•       Operating income growth of 80%

Market/Product Update
•       Honored with eight awards by NMEA
        including Manufacturer of the Year
•       Honored with IBEX Innovation award in
        the OEM electronics category

    6
Q3 2016 Earnings October 26, 2016 - Garmin International ...
Aviation
3rd Quarter Business Review
•       Revenue growth of 14%
•       Gross margin and operating margin
        remain strong at 75% and 28%,
        respectively
•       Operating income growth of 28%

Market/Product Update
• Received final certification of the
  G5000 equipped Beechjet 400A /
  Hawker 400XP
• Announced the expansion of our
  integrated flight deck to include a
  G5000 modernization for the Citation
  Excel and XLS

    7
Q3 2016 Earnings October 26, 2016 - Garmin International ...
Auto
3rd Quarter Business Review
• Revenue declined 21%                      `

• Gross margin expanded to 44% while
  operating margin remained consistent at
  12%

Market/Product Update
• PND global market share continues to be
  strong
• Launched VIRB Ultra, a HD 4K action
  camera

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Q3 2016 Earnings October 26, 2016 - Garmin International ...
2016 Guidance Update

                        Updated     Prior
     Revenue             ~ $2.95B    ~ $2.9B
     Gross Margin          ~ 55%      ~ 55%
     Operating Income     ~$580M    ~$550M
     Tax Rate             ~ 18.5%   ~ 19.5%
     Pro Forma EPS        ~ $2.65    ~ $2.50

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2016 Revenue Guidance by Segment

                   Updated    Prior
                   Growth    Growth
        Fitness     ~22%     ~20%

        Outdoor     ~24%     ~20%

        Marine      ~13%     ~10%

        Aviation    ~7%       ~5%

         Auto      ~(17%)    ~(17%)

         Total      ~5%       ~3%

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Financial Update

       Doug Boessen
      CFO and Treasurer

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Q3 Income Statement
      ($ Millions)              Q3 2016       Q3 2015      Change
      Revenue                         $722         $680           6%
      Gross Profit                      406          362        12%
         Gross Margin %              56.2%        53.3%      290 bps

      Total Operating Expense           246          237          4%
      Operating Income                  160          125        28%
        Operating Margin %           22.1%        18.5%      360 bps

      Other Income/(Expense)          (10)           39
      Income Tax                       25            46
      Net Income (GAAP)               125           119          5%
      Net Income Pro-Forma            141            97         45%

      EPS (GAAP)                     $0.66        $0.63          5%
      EPS Pro-Forma                  $0.75        $0.51         47%

      Units Shipped (K)               3,848       3,861

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Q3 Revenue

                                               Revenue by Segment
      ($ M)                                      Q3 2016      Q3 2015                                                Change
      Fitness                                      $189         $143                                                   32%
      Outdoor                                       141          110                                                   28%
      Marine                                         70           63                                                   12%
      Aviation                                      107           94                                                   14%
      Auto                                          215          270                                                 (21%)
      Total                                        $722         $680                                                    6%
      Action camera related net sales for the 13-weeks ended September 26, 2015 have been recast from the Outdoor segment to the Auto
      segment to conform to the current year presentation.

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Q3 Revenue & Operating Income
              Q3 2016 Revenue                           Q3 2016 Operating Income
                       10%                                             6% 16%
               15%                 30%                          19%

               19%                                                                28%
                                                                   31%
                                 26%

      Auto   Fitness   Outdoor    Aviation   Marine   Auto   Fitness   Outdoor   Aviation   Marine

              Q3 2015 Revenue                           Q3 2015 Operating Income
                       9%                                                5%
              14%                                               19%              26%
                                   40%
             16%
                                                                29%              21%
                         21%

      Auto   Fitness   Outdoor    Aviation   Marine   Auto   Fitness   Outdoor   Aviation   Marine

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Operating Expenses

       R&D ($M)                     Advertising ($M)                  SG&A ($M)
140                           140                              140
120                 114 116   120                              120
      106 106 108                                                         105        104
                                                                     94         96         97
100                           100                              100
 80                            80                               80
                                           57
 60                            60                               60
                                                     44
                                      37        32        33
 40                            40                               40
 20                            20                               20
 -                             -                                -
      Q3 Q4 Q1 Q2 Q3                  Q3 Q4 Q1 Q2 Q3                 Q3 Q4 Q1 Q2 Q3
      15 15 16 16 16                  15 15 16 16 16                 15 15 16 16 16

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Balance Sheet/Cash Flow/Taxes
 Balance Sheet
 • Ended quarter with approximately $2.4 billion of cash and marketable securities
 • Accounts receivable decreased sequentially due to seasonal trends but
   increased year-over-year on stronger sales
 • Inventory balance increased on a sequential basis as we prepared for the
   fourth quarter and remains higher year-over-year due to new product offerings

 Cash Flow
 • Generated $199 million of free cash flow in Q3 2016
 • Repurchased approximately $20 million in company stock in Q3 2016

 Taxes
 • Q3 2016 Effective Tax Rate (ETR) of 16.5% compared to 27.6% in Q3 2015

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Q3 2016 Earnings
October 26, 2016
Appendix
     October 26, 2016

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Non-GAAP Financial Information
     To supplement our financial results presented in accordance with GAAP, this presentation includes
     the following measures defined by the Securities and Exchange Commission as non-GAAP
     financial measures: pro forma net income (earnings) per share, forward-looking pro forma earnings
     per share and free cash flow. These non-GAAP measures are not based on any comprehensive
     set of accounting rules or principles and should not be considered a substitute for, or superior to,
     financial measures calculated in accordance with GAAP, and may be different from non-GAAP
     measures used by other companies. Management believes providing investors with an operating
     view consistent with how it manages the Company provides enhanced transparency into the
     operating results of the Company.

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Pro Forma Net Income (Earnings) Per Share
     Management believes that net income per share before the impact of foreign currency gain or loss
     and certain income tax adjustments, as discussed below, is an important measure. The majority of
     the Company’s consolidated foreign currency gain or loss is typically driven by movements in the
     Taiwan Dollar and the Euro in relation to the U.S. Dollar and the related exchange rate impact on
     the significant cash, receivables, and payables held in a currency other than the functional currency
     at one of the Company’s subsidiaries. However, there is minimal cash impact from such foreign
     currency gain or loss. The Company’s income tax expense is periodically impacted by material net
     releases of reserves primarily related to completion of audits and/or the expiration of statutes
     affecting prior periods. Thus, reported income tax expense is not reflective of the income tax
     expense that is incurred related to the current period earnings. Accordingly, earnings per share
     before the impact of foreign currency translation gain or loss and income tax adjustments that
     materially impact the effective tax rate permit a consistent comparison of the Company’s operating
     performance between periods.

     The net release of other uncertain tax position reserves, amounting to approximately $5.8 million
     and $7.2 million for the 39-weeks ended September 24, 2016 and September 26, 2015,
     respectively, have not been included as pro forma adjustments in the following presentation of pro
     forma net income as such amounts have been considered immaterial, tend to be more recurring in
     nature or are comparable between periods. The tax effect of foreign currency gains (losses) was
     calculated using effective tax rates of 16.5% and 27.6% for the third quarters of 2016 and 2015,
     respectively and 18.8% and 21.9% for the year-to-date 2016 and 2015. The effective tax rate is
     calculated by taking the Income tax provision divided by Income before taxes, as presented on the
     face of the Condensed Consolidated Statements of Income both on a quarterly and year-to-date
     basis.

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Net income per share (Pro Forma)
                                 (in thousands, except per share information)

                                                       13-Weeks Ended             39-Weeks Ended
                                                     Sept 24,   Sept 26,        Sept 24,   Sept 26,
                                                      2016       2015            2016       2015

     Net Income (GAAP)                               $125,054    $119,299       $374,209   $323,844
     Foreign currency gains (losses)                   19,421      (30,573)       30,003   14,177
     Tax effect of foreign currency gains (losses)     (3,204)       8,453        (5,654)  (3,104)
     Net income (Pro Forma)                          $141,271      $97,179      $398,558 $334,917

     Net income per share (GAAP):
      Basic                                             $0.66        $0.63         $1.98      $1.69
      Diluted                                           $0.66        $0.63         $1.98      $1.69

     Net income per share (Pro Forma):
      Basic                                             $0.75        $0.51         $2.11      $1.75
      Diluted                                           $0.75        $0.51         $2.10      $1.75

     Weighted average common shares outstanding:
      Basic                                         188,692       190,342      189,027       191,068
      DilutedNote:
              (GAAP)Tax effects are based on respective periods’ normalized
                                                    189,238       190,822 effective tax rate.191,523
                                                                               189,376

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Forward-looking Pro Forma Earnings Per Share

     The Company has not provided a GAAP reconciliation for forward-looking pro forma earnings per
     share because such measure cannot be provided without unreasonable efforts on a forward-looking
     basis due to the high variability and low visibility with respect to non-operating foreign currency
     exchange gains and losses and the related tax effects of such gains and losses. The impact of
     such foreign currency gains and losses, net of tax effects, was $0.12 per share for the 39-weeks
     ended September 24, 2016, as indicated above. No other pro forma income tax adjustments have
     been included in forward-looking pro forma earnings per share.

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Free Cash Flow
                                                 Garmin Ltd. And Subsidiaries
                                                       Free Cash Flow
                                                       (in thousands)

                                                                      13-Weeks Ended          39-Weeks Ended
                                                                    Sept 24,   Sept 26,     Sept 24,   Sept 26,
                                                                     2016       2015         2016       2015
     (in thousands)
     Net cash provided by operating activities                      $212,993    $137,834    $492,365 $122,131
     Less: purchases of property and equipment                       (13,543)    (13,565)    (42,157) (53,297)
     Plus: taxes paid related to inter-company restructuring             -           -           -    182,800
     Free Cash Flow                                                 $199,450    $124,269    $450,208 $251,634

       Management believes that free cash flow is an important financial measure because it
       represents the amount of cash provided by operations that is available for investing and
       defines it as operating cash flow plus non-recurring cash payments associated with our
       inter-company restructuring less capital expenditures for property and equipment.

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